The draft Merger Guidelines largely replace the consumer welfare standard of the Chicago School with the lessening of competition principle found in the 1914 Clayton Act. This shift would enable the Federal Trade Commission and Department of Justice Antitrust Division to utilize the full extent of modern economics to respond to rising concentration and its harmful effects, writes John Kwoka.

As the draft Merger Guidelines move into their last stage of finalization, it is important to recall the objectives originally set out by the Federal Trade Commission and the Justice Department (“Agencies”). The Agencies’ Request for Information issued in February of last year posed two questions: “how effectively [do] the current guidance documents capture the competitive issues raised by mergers today and whether these documents adequately equip enforcers to identify and proscribe unlawful, anticompetitive transactions.”

While the draft Guidelines change many aspects of their predecessor, one key change can be viewed as a direct effort to address the concerns expressed in the Agencies’ Request for Information. That change is the shift from the current focus on consumer surplus to the lessening of competition as the key metric of competitive harm. Most of the 13 specific scenarios (“guidelines”) in the draft Guidelines explicitly reference the lessening of competition; none mentions consumer surplus or market power. This distinction lies at the heart of the need for Guidelines revision. To see this, it is useful first to bear in mind what is known about the shortfall of recent past merger enforcement and then to evaluate how the shift in standard will help to remedy the problem.

The Recent History of Deficient Antitrust Enforcement

Since past merger enforcement has already been the subject of considerable discussion and debate, here we note only two points. The first concerns the rise of measured concentration and decline in competition. Over the past 20 to 30 years, countless industries have undergone massive consolidation with little or no opposition from the Agencies. These include consumer-oriented industries such as airlines, supermarkets, hospitals, and veterinary clinics; but also others where multiple competing brands have less visibly come under common ownership, as is the case with car rentals, home laundry equipment, and hotels. Add to that list even less visible producer goods industries such as meat packing, seed crops, and industrial chemicals. Many more markets have experienced similar increases in concentration, and there is much evidence that these changes have harmed competition.

The second issue is whether and to what extent antitrust can be faulted for this. Insufficient agency budgets and a skeptical judiciary are important, but the evidence on agency enforcement practices leaves little doubt about its failures. One agency’s own internal data reveals that it progressively narrowed the scope of its merger enforcement beginning in the mid-1990s. Over the next 16 years, it first ceased challenging all mergers resulting in more than seven firms, then ended challenges to those with six, followed by those with five, and ultimately all those resulting in more than four firms. By the 2010s, it was only taking action against those at the highest levels of concentration.

Paradoxically, by challenging only the most anticompetitive mergers—mergers to monopoly, three-to-two mergers, and some four-to-three cases—the Agencies compiled very a high won/loss record. But this is easy to do when they ignore the hard cases that should have been brought. Their won/loss record was not an indication of good enforcement.

Have the Agencies in fact ignored hard cases and hard issues? For too long they accepted the erroneous Chicago School proposition that most mergers resulted in economic efficiency. They embraced the fallacy that vertical mergers are almost always procompetitive. They overlooked harm to workers and farmers and small businesses from buyer power caused by mergers. They all but abandoned challenges to mergers eliminating potential entrants into markets in the face of a higher legal standard. They ignored nontraditional harms such as tying, bundling, and leveraging that extended market power from one market into another. They failed to act against mergers whose principal effect was to entrench market dominance. They demonstrated a naïve belief in ease of entry.

And in perhaps the most egregious example, the Agencies’ views have resulted in more than 900 acquisitions by the major tech companies —Amazon, Apple, Facebook/Meta, Google/Alphabet, and Microsoft—with only a handful of serious investigations and, up until the last couple years, not a single challenge. No one can seriously believe that literally none of these acquisitions posed a competitive problem. Indeed, there is now widespread criticism of the lax manner in which the Agencies handled Google’s acquisition of DoubleClick and Facebook’s acquisitions of Instagram and WhatsApp, among many others.

So any new commitment of the Agencies to vigorous merger enforcement needs guidelines that match these concerns. Only in that fashion will it be possible to reclaim the antitrust ground that has been lost or often simply ceded over time. The necessary revision must involve setting standards and criteria that reflect both the law and modern economics, and doing so in a manner that is fully operational and compelling.

The Economic Limits of the Consumer Welfare Standard

While it is possible to differ on specifics of the draft Guidelines, their overarching theme is concern with how a merger may lessen competition rather than its effect strictly on consumer surplus. There are several reasons for this shift. Some are familiar, but others less often appreciated. Many have now noted the consumer surplus standard has directed attention to price distortions in the markets for final products. But that focus overlooks how mergers can also distort the markets for inputs—wages and working conditions for laborers, and the prices that small businesses and farmers receive for what they supply to larger merging companies. A further problem with this standard is the undue attention it pays to price itself, even though significant competitive harm can arise from harder-to-measure aspects of transactions, such as quality, variety, and innovation. These latter issues are equally important even under a consumer surplus standard but have been overlooked simply because they are not so easily measured as price.

These criticisms are well-founded, but it is important to recognize even if these defects of the consumer surplus standard could be fixed (as some have attempted), that standard would remain critically defective. It would still handicap and undermine enforcement in ways that will be of growing importance over time.

One reason is that the concept of consumer surplus is of much less help for mergers where price plays little or no role, in which case there is no straightforward application of the standard at all. These mergers include those in zero-price markets and others for data acquisition, the very type of mergers that are increasingly common and important in our tech-oriented economy. In these markets, there simply is no obvious price or price distortion to consider, and efforts to convert the price distortion standard to one focused on the adverse effects on quality have encountered both analytical and practical obstacles. The harms to consumers and competition in these markets are not illuminated by that standard.

A second reason why a focus on consumer surplus would continue to handicap enforcement is in the case of mergers with long delayed or unpredictable effects. Examples of these are mergers where the key competitive concern involves harm to innovation, which is an inherently long run and often unpredictable process; or the entrenchment of a dominant position, where the purpose of current actions is to impede entry over time; or the elimination of a potential entrant that at some point in time would or might have deconcentrated a market. Attempting to measure the adverse effects of such mergers by consumer harm that will not arise for years, or for products that do not yet exist, or from preventing entry that would strengthen future competition, do not represent realistic burdens for merger enforcement. Not surprisingly, the Agencies often do not sustain these burdens, and over time they have chosen less often to raise them as central concerns despite their importance. And it is altogether likely that they will be of even greater importance in the tech and other markets going forward.

The implication of these concerns is that strict reliance on the consumer surplus standard is misplaced. But to be clear, this does not imply that consumer surplus has no place whatsoever in merger enforcement. To the contrary, in cases where price is the key strategic variable subject to competitive distortion, consumer surplus can be, as it has been, an invaluable tool. The archetypical case would be a merger involving so-called unilateral effects. In such mergers—typically involving differentiated products—the simple act of combining ownership of partial substitutes alters pricing incentives in ways that can be expressed using diversion ratios and price-cost margins. Without minimizing the issues that sometimes arise in measuring those variables, the point here is that it is feasible and compelling in such cases to express how the merger directly changes incentives regarding price, and ultimately to capture the consumer surplus implications of the merger.

So, where it is possible to predict that the key directly measurable outcome of the merger is price, the consumer surplus standard is a good match for the competitive concern. But in the other examples cited above, either price does not exist, or is not the key metric, or is unpredictable for reasons of timing, in which case focusing on price effects and consumer surplus is not practical or even sensible.

Why the Shift to the Guiding Standard of the Lessening of Competition

So how does a lessening of competition standard help to resolve this? The key is to recognize that the effects of mergers reveal themselves in stages over time—some sooner, others only later—and the policy standard should match the emergence of specific harms over time. The consumer surplus standard is a measure of the outcome of a merger in a price-oriented market but is best suited for mergers whose effects are more immediate and focused on price. For mergers whose effects are more distant in time and uncertain in detail, the policy focus should be on the logically earlier stage of the process by which competitive harm may emerge, namely, whether and how the merger has distorted the competitive process itself.

This is what the draft Guidelines seek to accomplish by shifting focus to the lessening of competition. After all, if the competitive process itself is now distorted by a merger, that will predictably result in a distorted outcome in the near or possibly not-so-near future. For enforcement purposes, the crucial fact is that any distortion of the competitive process is more immediately evident than the often unmeasurable or delayed distortion of outcomes. For these reasons the guiding principle for enforcement should be whether the competitive process has been distorted, a determination sufficient by itself but supplemented where feasible with evidence on the specific outcome.

Strikingly, this proposed standard is not in fact at all new. The Clayton Act of 1914 does not speak in terms of price or consumer surplus, but rather it explicitly is directed at mergers that “may substantially [to] lessen competition.” Restoring lessening of competition as the guiding principle of the guidelines therefore returns antitrust enforcement to the language of the law as well as providing a tool for reclaiming parts of the antitrust mission that are not operationalized by the consumer surplus standard that has dominated recent enforcement policy.

How the lessening of competition standard assists in these important aspects of merger policy can be illustrated by some of the issues previously noted to have languished. Consider, for example, entrenchment. That entrenching a market position can lessen competition should not be a matter of serious dispute. Mergers that permit the imposition of switching costs or engage in strategic bundling or increase dominance of necessary data services may not directly or immediately result in a price increase or other specific harm. In time, however, such mergers insulate incumbents from competition and set the stage for the exploitation of opportunities to harm competition. Unlike unilateral price effects, however, the precise mechanism and effects of entrenchment strategies are difficult to predict at the time of the merger and well-nigh impossible to quantify with any confidence.

Mergers that combine firms engaging in significant innovative efforts are a further illustration of this difficulty. Innovation is of course an inherently longer-term activity, the outcome of which is subject to delays and unpredictability. Representative scenarios include mergers that combine firms at different stages of the innovation process, or that strive for what might be competing products, or that are simply involved in primary research whose outcome and timing are subject to great uncertainty. All these types of mergers pose what can be nearly insurmountable obstacles to merger enforcement if the eventual harm to consumers must be established. The ultimate product or service itself may be unknown, its characteristics and timing unclear (sometimes to the firms themselves), its pricing and competitive force to be determined only later on. Any attempt to anticipate these in order to project the consumer surplus implications is not at all likely to succeed.

A further example of these difficulties are mergers that eliminate a potential competitor or a nascent competitor. Determining the market-wide effects of the acquisition of a firm that might otherwise have entered and strengthened competition requires predicting the nature of future competition with and without that firm. This is a challenge for economic modeling and estimation, compounded by a legal standard requiring considerable certainty about the likelihood and necessity for particular entry. In the case of a nascent competitor, these difficulties are even more substantial, since a nascent competitor is one that is currently assessed as having the capability of evolving over time into a fulsome competitor to an established firm with market power. But that assessment poses substantial difficulties in predicting the nature and timing of the actual outcome.

In each of these cases, a standard that focuses on the more immediately evident effects of a merger—whether it lessens competition—would restore vitality to the competitive concerns just described. A merger that now makes customer switching more difficult lessens prospective competition. A merger of firms with significantly overlapping innovation programs lessens current innovation competition with predictable later adverse effects. A merger that eliminates a plausible potential entrant into a noncompetitive market prevents predictable deconcentration of that market, with resulting harms, even if those harms cannot now be specified and quantified. 

So in this framing, the lessening of competition is the standard against which mergers are to be assessed, one subset of which can be measured by consumer surplus. These examples demonstrate how this framing helps to operationalize certain antitrust concerns that are not well captured by the current approach. To be sure, there are analytical issues surrounding the notion of the lessening of competition, but revising the Merger Guidelines in this manner is the first and necessary step in this process of reclaiming important lost antitrust ground.

Author Disclosure: John Kwoka worked on the draft Merger Guidelines while serving at the Federal Trade Commission as chief economist to the chair in 2022.  The views expressed here are strictly those of the author.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.